Germany unsure about supporting Cyprus

Will the tiny country of Cyprus be the next trigger for euro zone turbulence?

That’s the niggling fear of investors, given the rising risk that German politicians might veto the emergency bailout of a country that only accounts for a miniscule 0.15 per cent of the euro zone’s output.

Cyprus is seeking a €17.5 billion ($22 billion) bailout – or roughly the size of the country’s entire gross domestic product. Of this, around €10 billion will go to its troubled banks, which have been hard-hit by their large exposure to Greek debt, and by the collapse of the country’s property bubble.

But the bailout is proving particularly controversial, with Germany’s opposition Social Democratic Party threatening to vote against the bailout. “As things currently stand, I can’t imagine German taxpayers bailing out Cypriot banks, whose business model depends on abetting tax fraud," party chairman Sigmar Gabriel told the Süddeutsche Zeitung this week.

Even members of Angela Merkel’s conservative coalition are dubious of the merits of the bailout. Rainer Brüderle from Merkel’s junior coalition partner, the Free Democratic Party, said he was concerned that a large slice of any aid deal could go to Russians who have laundered money through Cyprus. He said the Bundestag would likely reject a bailout deal for Cyprus.

“Based on what we know now, I don’t see a [parliamentary] majority for financial aid," Brüderle told the Bild newspaper. “If the impression exists that German taxpayers are to be liable for dirty money, the aid would not be manageable or acceptable."

Unease about a Cyprus bailout has increased after the German publication Der Spiegel reported in November that Germany’s foreign intelligence service, the Bundesnachrichtendienst (BND), had written a secret report that said the main beneficiaries would be Russian oligarchs, businessmen and mafiosi who had invested their illegal money in Cyprus.

According to the BND, although Cyprus has anti-money laundering laws, little attempt is made to combat the practice. In 2011 alone, some $US80 billion ($75.6 billion) flowed out of Russia, much of it was channelled though Cyprus. According to the BND, Russians have deposited $26 billion in Cyprus’s banks, well above the country’s GDP.

Related Quotes

Company Profile

Despite these concerns, European politicians are deeply reluctant to allow such a small country to ruin the progress that has been made in restoring the euro zone’s stability, and are pressing ahead with plans for the country’s bailout.

But these are proving difficult. At present, negotiations between Nicosia and the “troika" have stalled because the country’s communist president, Dimitris Christofias is refusing to accept asset sales. There are suggestions the country’s bailout could be delayed until Christofias steps down next month. This would also give Cyprus some time to make some progress to clean up its banking practices.

According to European Commissioner for Economic and Monetary Affairs Olli Rehn, Cyprus is also coming under intense pressure to tackle its money-laundering issues as part of its bailout.

“We place the absolute highest priority on getting rid of money-laundering in Cyprus once and for all," Rehn told the German daily Handelsblatt in an interview to be published later today. “We now have to ensure that these laws are actually enforced. I’m aware of the problems."

It remains to be seen whether that will be enough to persuade German politicians to support the country’s bailout.